Weil distress index shows UK companies at highest level since June 2020

Corporate distress levels in Britain accelerated in the three months to February to their highest since June 2020, an index compiled by law firm Weil Gotshal & Manges shows.

But corporate distress across other big European countries slowed marginally as expectations of a deep and prolonged recession eased according to the index, which measures the number of companies facing difficulties in paying their debt.

The study, which aggregates data from more than 3,750 listed companies and financial market indicators, is tracked against default rates and shows a roughly 12 month-lag before distressed levels translate into actual default rates.

This suggests that default rates will start rising soon. S&P expects default rates to reach 3.75% and 3.25% in the United States and Europe, respectively by September, more than double the 1.6% and 1.4% in September 2022.

Weil's quarterly European Distress Index rose to 3.1 in the quarter to February, versus 3.0 in November. The UK Distress Index, a component of the European index, hit a 6.7 peak versus 3.5 the quarter before.

A sub-index showed that distress in the European real estate sector was stable at 4.7 versus the prior quarter, but remained higher than a year before, when it was negative 2.4.

"The direction of travel is moving away from Europe towards the UK, which is beginning to look much more at risk due to higher inflation as well as increased operating and input costs," said Andrew Wilkinson, senior partner and co-head of Weil's London restructuring practice.

Real estate across Europe remains the most distressed sector by some margin, the index showed.

Weil said that in Britain, the housing sector is only just recovering from turmoil unleashed by the government's mini-budget in September, and continues to struggle.

The mini-budget sparked a surge in government borrowing costs and mortgage rates.

The recent collapse in the U.S. of Silicon Valley Bank and rescue of Credit Suisse by UBS in Europe have also put the banking sector under the spotlight.

"The financial system certainly has some elements of fragility but we do not expect another banking or sovereign debt crisis," Wilkinson said.